Discontinuation of ISP by K-Electric to add salt to the wound of Amreli Steel

March 6, 2020 (MLN): Amreli Steel Limited (ASTL) held its analyst briefing on March 4^th to discuss the financial and operational performance during 1HFY20 and shed some light on the future outlook of the company.

To recall, the company had posted a net loss of Rs 312 million (LPS: Rs 1.06) for the half-year against net profits of Rs 516 million (EPS: Rs 1.74) of the same period last year.

According to the research of WE, the management stated the company’s profitability was primarily hit on the back of weaker margins, rupee devaluation and higher electricity cost. Also, ASTL has adopted IFRS 9 standards which resulted in higher provisioning for bad debts, hurting the company’s profitability.

Moreover, the adoption of IFRS 15 by ASTL, did not materialize impact at the time of revenue recognition.   

Going by the details provided by the WE research, the damages suffered by ASTL was also attributable to Fuel Cost price Adjustment (FCPA) and Industrial Support Package (ISP) by K-Electric since last 4 years as the company has to pay additional cost of 0.3-0.4/ KWH for FCPA and Rs 3 per unit for ISP. The ISP alone cost Rs 550 million for a mentioned period. During FY20, management believed that breakeven point heavily hit by the KESC cost despite an increase in ASTL margins.

Shedding some light on future outlook, the management disclosed that the company targets to achieve market share in South from 33% to 40%. Following its footprint in the North, the company also intends to increase its company sales to 25%, as per research note of BIPL securities.

Also, the management disclosed its plan to change depreciation policy as its current depreciation policies are more aggressive in some areas as compared to its peer, MUGHAL, revealed Foundation securities research.

As per management, the company believes that sustainable volumetric growth in 2yrs, ASTL would touch 90% utilization mark that alone will reduce production cost by around 4.5k per MT, BIPL research added.

However, a hike in tariff and high competition will put pressure on prices as the entry of new players Al-Haj FAW, MUGHAL, Naveena and Agha steel can be a major threat to company’s profitability in the long steel segment,  highlighted by Intermarket research.

Speaking of the challenges facing ASTL, higher distribution cost due to Axle load regulation, CNIC condition, 10 million sales limit for non-registered clients, import restriction from India, 1.5% turnover tax on dealers and smuggled products from Iran are core impediments to demand growth for the industry, which would ultimately affect the pricing power of ASTL. Moreover, supply chain disruptions from China and Hong Kong cannot be ignored due to coronavirus.

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